Possibly, it is banks involved with physical commodities, a topic of national prominence largely due to UNC School of Law associate professor Saule Omarova’s seminal research and congressional testimony.

Omarova’s new article, “The Merchants of Wall Street: Banking, Commerce and Commodities,” (Minnesota Law Review, forthcoming 2013) contends that regulations that enable U.S. financial holding companies’ involvement in commodities potentially undermine the fundamental principle of separation of banking and commerce. That separation aims to ensure a sound banking system and smooth credit flow, and to prevent too much economic power in any one financial institution. The regulatory structure to monitor banking organizations’ dealings in global energy and commodity markets is insufficient, according to the article.

“The need to prevent potentially excessive accumulations of both risk exposure and market power in the hands of a few large FHCs (financial holding companies) is paramount in this respect. When the same banking organizations that control access to money and credit also control access to such universal production inputs as raw materials and energy, they are in a position to exercise disproportionate control over the entire economic — and, by extension, political — system,” the article states.

The key point of her article and her testimony July 23 before the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection is that, to address potentially crucial public policy issues, regulators and the public must know the extent and implications of holding companies’ dealings in gas, oil, metals and other commodities.

Omarova’s article has moved federal regulatory agencies and Congress in that direction. She notes that shortly before the July 23 hearing, the Federal Reserve said it is reviewing its 2003 decision that for this first time allowed a financial holding company to trade physical commodities. After the hearing, JPMorgan announced its intention to potentially divest at least some of its commodities holdings. The Commodity Futures Trading Commission has subpoenaed Goldman Sachs and other companies regarding their metals warehousing activities. And the Department of Justice has indicated interest in potential antitrust issues.

Starting a national debate was Omarova’s aim.

“I hope Goldman Sachs, JPMorgan and Morgan Stanley will have to explain what exactly they own and do in this vast space and prove they should be allowed to continue their activities for the benefit of the American economy. I also hope that the Federal Reserve takes a serious look at its own failings in understanding the systemic implications of allowing big banks to morph into commodity merchants…. And it would be great to see Congress take a hard look at the relevant provisions of the Bank Holding Company Act, added by the Gramm-Leach-Bliley Act of 1999, which effectively allowed the recent expansion of banks into physical commodities without imposing any meaningful limitations,” Omarova says.

Her research has drawn interest from the New York Times, Financial Times, Reuters, Wall Street Journal, National Public Radio, Bloomberg BusinessWeek, The Huffington Post, Los Angeles Times, Salon.com, “The Daily Show” and others.

Supporters of banks’ involvement in commodities contend that banks can “provide cheaper financing for commercial companies that produce or consume such commodities,” Omarova says.

“The real policy question is whether the efficiencies accruing to private parties in any specific transaction are fundamentally rooted in the public subsidy we, as taxpayers, provide to big banks,” she says. “Is it really a socially efficient solution to allow this indirect spread of the public subsidy to benefit individual companies’ purely commercial activities that were never meant to be publicly subsidized? It may well be that our society decides that’s the best option. But that decision must be based on a full analysis of the pros and cons of allowing big banks to act as oil, gas, power and metals merchants.”

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